Rewards cards are deceptively simple. Swipe, pay and win. Simple enough, right? Everything you earn you can redeem for cash, statement credits, flights, gift cards, merchandise, anything.
But with such earning potential, rewards cards also come with some risk. Using your credit card in a regular disadvantageous way will come back to haunt you, often in the form of fees and interest earned. If the bad habit persists, it can even wreak havoc on your credit score.
What exactly are these risks and how can you avoid them? Let’s see how you can get the most out of your rewards credit card.
carry a balance
Perhaps the biggest credit card mistake you can make is carrying a balance on the card.
Having a balance means that you haven’t paid for purchases from the previous month. For example, if your statement says you need to pay $500 by a certain date and you only pay $350, you will carry over $150 to the next month’s billing cycle.
This is when things can get tricky. For one, you will start paying interest on that $150. Your credit card provider will go back to the dates you charged that $150. Then they will charge you interest for each day between that date and the day you finally pay them.
Since rewards cards have interest rates between 19.99% and 29.99%, you could end up paying a lot of interest. And if you continue to use your card, the balance will only increase. At some point, you may not have enough to pay the minimum payment, which will lead to late fees and a damaged credit rating.
If you’re struggling to pay off your monthly balance, consider getting a balance transfer card with a low introductory APR. The low interest rate of the new card will help you invest more in your principal and less in your debts.
Using too much available credit
Credit card providers will give you a credit limit on your rewards card. In theory, you can use 100% of your credit limits without incurring any fees. In practice, however, using 100% of your card’s credit limits (or even 30%) is never a good idea.
On the one hand, you run the risk of being charged more than you can possibly pay, which can lead to higher interest and late fees (if applicable). Second, you can damage your credit score.
A big part of your credit score is your credit utilization ratio (30%). This measures the amount of credit you use compared to the total amount of credit you have on all your cards.
For example, if you charge $3,000 on one card and you have a total of $10,000 on all your credit cards, you will have a credit utilization of 30%.
For Canadians, 30% means pushing the limits. In general, you want to keep your utilization rate below 30%, although 10% or less is even better. The less credit you use, the less cash-strapped you appear to lenders, which could help you if you apply for a loan, mortgage, or other rewards credit card.
Miss a payment
Late payments are serious business.
Making a payment after its due date could have a major impact on the payment history component of your credit score, which is 35%. Worse still, a missed payment stays on your file for six years.
Fortunately, credit card companies will give you time to make a missed payment before reporting it to the credit bureaus. Usually you have 30 days to make a payment once it’s deemed overdue, although some credit card companies may give you more time.
Buy more than you can afford
A rewards card helps you borrow money. But it don’t help you if you borrow too much many. Maxing out your rewards cards — not paying them out by the end of the billing period — means you’re going over budget to make purchases. Do it too often and you will have a very costly credit card habit on your hands.
If you’re the shopping type, you might want to work out a detailed budget beforehand. Know exactly what expenses will go to your credit card (groceries, gas, entertainment) and what habit, and you’ll be in a better position to say no to things you really can’t afford.
Use your credit card the right way
The rewards cards look simple. And, for the most part, they are. But, if you want to enjoy all their rewards and benefits, while avoiding pitfalls, try to use them strategically. Along with getting the right credit card, avoiding these rewards card pitfalls will make your hard-earned rewards work hard for you.